After years of lagging behind other industries, cloud computing projects are now becoming commonplace in the finance sector. But while such initiatives have generally centred around non-critical systems such as email and customer relationship management (CRM), banks are set to start entrusting core systems to public cloud providers too.
According to John Schlesinger, chief architect at Temenos - which sells banking software to some of the world’s largest lenders - the majority of new core banking projects launched by the end of this decade will be in the cloud.
“We think that by 2020 most core banking initiatives will be in the cloud,” Schlesinger told Computerworld UK at the Temenos Community Forum in Lisbon this week. He claims it is a case of ‘when’ and not ‘if’ banks adopt the technology at the heart of their business. Temenos itself has already made headway with a small number of regulated and lightly-regulated micro-finance banks that are currently using its software as a service platform.
At this stage the number of banks running core banking in the cloud is small. But while adoption is currently low, it is an increase from just one percent the previous year, and Schlesinger expects that this will grow quickly.
“We believe that by 2020, which will be after PSD2 and after Instant SEPA, that the trickle will become a tsunami,” he said.
The first steps are already being made in the UK. Newly launched OakNorth was one to be the first UK bank to run its Mambu core banking systems in the cloud last year, migrating the platform to Amazon Web Services. Digital retail challenger bank Monzo, which built its core systems from the ground up using modern infrastructure software tools such as containers, also moved its core systems. Meanwhile, Metro Bank recently migrated its core infrastructure into a private cloud managed by Rackspace.
The approach makes sense for smaller challenger banks, lowering infrastructure costs and helping removing one of the barriers to entry in the market. “What cloud does is make everything cheaper. The on-premise story dramatically would lose out to the cloud story, given the economics of manufacturing of machines.”
“A new initiative today like Atom Bank or Starling Bank may not be in the cloud, but by 2020 it would be,” he added.
For the UK, regulation is no longer a barrier that prevents data from being held in the data centres of AWS, Azure and others, with the UK’s Financial Conduct Authority publishing guidance for lenders last year. “We don't think in the UK there is a regulatory problem, the problem is we are a very consolidated banking market, and for a bank to be in the cloud it would have to be a new initiative.”
Big Four held back by legacy infrastructure
For the Big Four UK banks the situation is different. Should they wish to move core systems out of their data centre in future, the main barrier is their reliance on complex legacy infrastructure, built up over decades in many cases.
“The big banks have a huge problem because for them it is a huge project to move their core banking,” Schlesinger said. “I think the only way they can do it is a build and migrate strategy and what they build should be built on top of infrastructure as a service. So over a fifteen-year period migrating core banking into the cloud.
“They’ll start the process in a couple of years’ time and they won’t finish it for a decade. So the data centres will be there running the existing systems but on a legacy basis.”
There are a number of potential benefits of moving core banking to the public cloud, alongside lower costs. The flexibility of cloud computing helps lenders move more quickly to compete with nimble finch competitors, rather than relying on legacy infrastructure. There are also benefits around security for many banks, with the hyper scale cloud providers able to employ huge teams of security specialists that dwarf the number available to all but the biggest financial firms in order to protect system.
There are also numerous options in terms of routes to the cloud - IaaS, PaaS, SaaS and public, private, managed - and these will appeal to different banks depending on a range of factors, said Schelsinger. This includes the individual bank’s size and the geographies they operate in.
“I don’t think all the banks will do the same things,” said Schlesinger. “So for a tier one initiative, they will buy infrastructure and they will build platforms and software as service on it. That is the Tier 1 bank at home - so Chase in the US, or HSBC in the UK [for example]. But a Tier 1 bank out of geography looks more like a Tier 2 bank. I see Tier 2 banks renting platform as a service, and actually we are seeing that already in some of the RFPs we are getting.
"For all other banks, that's the Tier 3, 4 and 5, they will be buying software as a service, running very, very low entry costs."
In other news at the Temenos’ 18th annual European customer event, the Swiss vendor announced an update to its MarketPlace platform, launched last year to help connect bank and fintech firm services ahead of the PSD2 regulations. Temenos has added new functions to the MarketPlace such as a Sandbox platform as a service non-production environment to make it easier to test MarketPlace services.